Battered Rio May Turn Eye To China

The Age

Thursday November 27, 2008

BARRY FitzGERALD

BHP Billiton chairman Don Argus wanted to create a national champion with his dream of merging BHP with its long-time adversary in the global resources scene, Rio Tinto.

But the fear following BHP's abandonment of the $105 billion takeover dream is that the seeds have been sown for a severely share-price-damaged and financially stretched Rio to pursue its next best option - a deal with the Chinese.

Rio already has the state-owned aluminium group Chinalco on its share register, with a 9 per cent stake held in partnership with Alcoa of the US as the junior partner. It was acquired in February at prices four times the current level.

The clear intent of the acquisition was to block BHP from moving to outright control of Rio. It succeeded in the sense that BHP was forced to move the minimum acceptance condition in its bid from 90 to 50 per cent. And Rio chairman Paul Skinner happily volunteered this week that Rio's "dialogue" with the Chinese "has developed" since February.

While Chinalco/Alcoa are now wearing a $US10 billion loss on their February counter-attack to BHP, they are relishing the prospect of now dealing on asset joint ventures/sales with a still independent Rio.

Chinalco is essentially an aluminium group with some broader interests. Alcoa is pure aluminium. But Chinalco's state-owned status has long suggested that its foray on to the share register had as much to do with Beijing's interest in aluminium as it did with iron ore, coking coal and copper and ensuring that BHP did not work its way in to controlling the lot.

Speculation in the no-BHP bid environment grows that Chinalco/China could now seek to take advantage of Rio's shell-shocked share price and its developing dialogue with Rio to march at least 15% of the company (it has a Federal Government OK to do that).

E.L.&C. Baillieu resources analyst Ray Chantry said it was possible that Rio could place 5per cent of its equity above the market price (Chinese companies have/are already doing this in Mount Gibson and Gindalbie), moving up to 15 per cent and bolstering Rio's balance sheet.

He also raised the prospect of more than that. "There may well be a real test for the Rudd Government when China, through Chinalco, launches a full bid for Rio," Mr Chantry said.

© 2008 The Age

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